And make no mistake, there has been deleveraging. While
some people like to talk about how we've only "kicked the can"
because government debt is up so much, the truth is that total
debt-to-GDP (when you include all private and public debt) has
declined nicely in recent years.
It's now at a 6-year low.

How did the US accomplish this extraordinary feat?

Basically a combo of the following: String-free bailouts, easy
monetary policy, and a refusal to embrace the austerity obsession
that's gripped the rest of the world.

People complain about all of these things, but the fact of ths
matter is that they work.

But now the US economy faces its first real test of the entire
recovery. Serious policy decisions have to be made in a short
period of time, because if they're not, then the US will
experience a sharp dose of austerity, and the economy will
succumb to the same illness that's gripped much of the world.

This chart from Goldman nicely shows what's at stake. With no
deal, the drag on GDP will be over 3%. Even with a deal, the drag
will be over 1.4%.

Goldman
Sachs

Unfortunately, history is pretty cruel to countries that practice
premature austerity.

Richard Koo of Nomura is the foremost
expert on balance sheet recessions (having analyzed Japan
extensively) and what he shows is that periods of premature
austerity saw renewed recessions and higher deficits.

Richard
Koo

It doesn't have to be a total disaster. The CBO has recently made
clear that there are probably ways for the US to get some
additional revenue without tanking the economy, but the risks are
significant.

And realistically, this is probably the last huge test of the
crisis recovery. There are signs that the US economy is breaking
out of its "liquidity
trap", meaning we may be heading to more normal times when
monetary policy can actually help stimulate the economy.

But right now, if politicians do nothing, we'll see austerity,
and if politicians do something, we might still see
austerity.